Shares of Trent Ltd – which runs Zara, Zudio and Westside – have surged up over 50% in the past six months, analysts at HDFC Securities advise caution to investors as they see the stock hitting brought patches going forward.

The Trent Analyst: Jay Gandhi for HDFC Securities maintained the “sell” rating on the stock with a price target of ₹1,370. The target indicates an around 84% downside from the stock’s last closing price of ₹2,084.80.

The Trent Thesis: The analysts observed that Trent, across its various retail formats, has been consistently enhancing its value proposition. This strategy aims to increase its Total Addressable Market (TAM) by passing on the benefits of improved sourcing margins, alongside enhancing product selection, directly to consumers. In return, Trent has been rewarded with higher footfall density, meaning that more customers are visiting its stores.

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However, the brokerage said that investors may have suspended their disbelief regarding the sustainability of key performance indicators (KPIs) and earnings power at Zudio. Firstly, the brokerage expressed concern that Zudio’s sales density is currently stretched at approximately ₹18,000 per square foot. Analysts add that their proprietary store map suggests that expanding beyond the current scale is likely to lead to lower sales density and, consequently, lower unit economics.

Secondly, a significant portion, approximately 58% of the profit after tax (PAT) for the fiscal years 2022 and 2023, appears to have come from Inditex dividends and mark-ups on fixed assets sold to franchisees. There may be doubts about the sustainability of these income sources over the medium to long term.

The brokerage firm also said that while the Tata Group company’s working capital management and well-capitalised balance sheet remain best-in-class its current valuation is expensive.

Price Action: Trent’s share price was up 1.11% to trade at ₹2,108 on Monday afternoon.

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